Intermediate Information: October 2007 Archives

if our house is being foreclosed, can they take our retirement or make us sell our cars?

we both have 2006 cars that are paid off. Can they take our cars or make us sell them to pay them some money?
Can they place a judgment to take our retirement 401k?

Depends upon the law in your state, and whether the loans you have are subject to recourse.

Here in California, purchase money loans are not subject to recourse. Providing you don't commit fraud or any of the other things that void this protection, once they take the property, that's it. If your loan was purchase money, used to buy the property, they shouldn't be able to win a deficiency judgment after foreclosure.

However, this isn't likely to be as innocent a situation as all that. Can't make the mortgage payment, but have two vehicles less than two years old which are all paid off? That says "cash out loan" to me!

I am unaware of any circumstance under which a "cash out" loan is not full recourse. It's not like you did it by accident. Now, if as I suspect may also have been the case, false promises were made to you as to your payment, interest rate, etcetera, that's a matter to take up with the people who did your loan. Actually, probably better to have your lawyer take it up with their lawyer. But that doesn't mean the current holder of that loan isn't entitled to their money.

If, as I suspect, you "cashed out" to pay for those cars, then you've got a full recourse loan, and they can pursue a deficiency judgment. Once they've got that, talk to a lawyer about whether they can get court approval to take your vehicles. But they're going to get the deficiency judgment if they try. That one is pretty cut and dried. Unless there's something reasonably unusual going on, for which consult a lawyer, you're likely to be better off agreeing to it in the first place, rather than forcing them to pay attorney's fees and having the judgment say you've got to pay their attorney fees as well as your own, in addition to the base deficiency. My understanding is that safe harbors for assets in this case are intentionally as few as the legislature can make them.

One of those few safe harbors, though, though, is likely to be retirement accounts. Retirement accounts are a protected asset class, and while I suppose it's possible for a creditor to get at them, I've never heard of a case of them being successful, at least not until you start withdrawing from those accounts. Once it gets withdrawn, of course, the money you withdraw is ordinary income, and therefore, fair game. This can lead to the sort of situation computer programmers call a deadly embrace. They can't get at the retirement account as long as the money is in there, you can keep the money in the retirement account, but if you try and withdraw it for use, they can then get at it. They can't get it until you try to use it, but they can get it if you do. Usually, people in this situation negotiate a settlement

How do I keep my home after filing bankruptcy. The Mortgage company wants to foreclose?

I want to know if there is anyway to keep the home even after filing chapter 7 bankruptcy. I want to know if there is any program that can assist me.

Bankruptcy does not effect your current mortgage. The only thing that will cause you to go into foreclosure is not keeping up your mortgage payments, period.

You don't have to include your mortgage in chapter 7, and it's not usually a good idea to do so if you have significant equity. Leave it out, and you even have a mechanism to restore your credit already in place, while limiting the damage the bankruptcy does. The larger the percentage of your lines of credit you include, the worse the hit is. Furthermore, if you have an open mortgage when your bankruptcy concludes, you're establishing post bankruptcy credit history, the best way to rebuild your credit. The poor folks who have to go get a new credit card get dinged even harder for each turndown, so that each successive application lowers the probability their next one will be accepted. Positive feedback to a negative end. Vicious cycle.

Talk with a real lawyer in your state to be certain. I'm not a lawyer, and I don't even play one on TV. However, my understanding is that Mortgages are debt secured by a specific asset - the property. Keep up the payments on that (or bring it current if you haven't) and general creditors with unsecured debt cannot touch that asset in most states and most situations. There are exceptions, but owner occupied residential real estate is one of the most protected assets there is. The fact that it is a loan secured by a specific asset can also be used to avoid compromising the mortgage holder's interest.

The upshot is that if you make your payments on the property, and keep them current, quite often it can sail through a bankruptcy untouched. People will often let everything else go to keep making the payments on their mortgage - one of the reasons why mortgage rates are so favorable, compared to unsecured credit. Another issue I should mention is that while A paper does care about non-mortgage late payments, subprime generally doesn't. As long as you keep your mortgage payments current, you can often secure a loan on surprisingly good terms, even though it'll likely have a prepayment penalty. So keep your mortgage current if you can.

Ken Harney has a column I found in the local rag yesterday. It seems that there is (finally!) concern amongst the regulators for this risky loan which begs for trouble for consumer, lender, and the system as a whole when there are too many of them out there.

First off, Mr. Harney is wrong, or his editor really screwed up what he did write (The Washington Post? <sarcasm>Say it isn't so!</sarcasm>). Read the contract. The attraction of negative amortization loans has nothing to do with the actual rate. Zero. Zip. Zilch. Nada. It has everything to do with lower permitted payments. There is not one day, not one hour, not one second where the actual rate being charged is reduced even by a miniscule amount. But for a certain amount of time, the minimum payment is calculated as if the rate is lower than it actually is. This is why they are easy sells - because the average real estate consumer "buys" a loan based upon the payment. So when someone tells the average consumer that they can get a "$170,000 mortgage for $850 per month!", it sounds attractive and the majority of people won't investigate any further. A large portion will actively avoid anybody who tries to tell them what's really going on, as if the loan will somehow magically be alright if they manage not to hear about all the bad stuff.

Furthermore, the real rate on these loans is variable from day one. There literally is not one month where you can truly predict what the next month's payment will be. I have, and always have had, lower interest rate loans that are hybrid ARMS with truly fixed interest rate for five years or more, have lower costs to obtain them, and no hidden gotchas. Heck, from my first day in the business I've always had loans that fit all of the forgoing criteria and require interest payments only. If you cannot make a payment of at least the full amount of the monthly interest, it is quite likely you shouldn't make the purchase.

These loans do have a niche. But I can't think of a case where they should ever be the purchase money loan for a property. Even on refinances, they should be no more than one percent of total refinances - not the forty percent share of San Diego's purchase money market the last figures I saw had them having. Investment property, the rules should be somewhat looser, but still nowhere near 40 percent of the market is appropriate. If this were the securities or accounting industries, the regulators would be throwing people into jail over this, and shutting down offending companies completely and permanently. There's a world of hurt coming down the pike, and the prevalence of these pieces of garbage is going to greatly exacerbate the problems, particularly in high cost markets. Let's say, hypothetically, someone put 5% into a $500,000 home here in San Diego at the beginning of the year, at a nominal rate of 1%. They had one $400,000 mortgage and one $75,000 mortgage. Assuming the nominal rate on the first is 1% and that the second is "interest only" as is common, they would now owe $10,000 more on a home that is worth about $30,000 less. After three years, they owe a total of $505,000 even if the rates don't rise any more, which I can promise you they will. If values hold steady right now, their home is worth maybe $470,000, of which they would get about $440,000 if they sold without paying any closing costs for the buyer, which isn't happening right now. So under perfect theoretical conditions, they've gone from having $25,000 in the bank to having to come up with $65,000 just to get out from under. Since they likely can't, their credit is going to be ruined for ten years at least, plus they're going to get a love note from the IRS saying they owe taxes on $65,000 more income (which incidentally slides most folks into higher marginal brackets).

You can survive being "upside down", owing more on your mortgage than your house is worth, for a long time if you have the right loan. These are not the right loan for market conditions I see happening in the next few years. They are always risky, and mortgage lenders and brokers who do them do not have, in the aggregate, an even vaguely acceptable track record of disclosing their risks. Not that it's any great shakes of a prediction, but I predict that lawyers will be prosecuting a lot of these as civil cases in the next few years, and winning large judgments that are not going to be covered by insurance because it's neither an error nor an omission, but an intentional misrepresentation.

Under the right conditions, these can be useful loans. But the right conditions are rare, and when you have them, the lenders are not likely to approve the loan because the prospective borrower is not a good credit risk. In short, if you're approved for one of these, you almost certainly had better much options available to you. If negative amortization loans are actually appropriate for you, I'll bet a nickel your loan won't be approved. This is the kind of marketing strategy which has gotten many industries in serious trouble, and the lenders who are involved in this are likely to be hurting anyway when the house of cards they've been supporting comes tumbling down. Expect corporate bankruptcies, also.